Previous articles in this series about the pragmatic use of KPIs in organisations, are available at the links following this article. This particular article looks at KPIs as part of an overall framework of organisation control.
KPIs are part of a whole
KPIs, especially when widely published and/or used to calculate personal bonuses, are an amazingly powerful set of behaviour modifiers. As explored in previous articles, KPIs can set and/or communicate direction to staff and other stakeholders, encourage hard work and innovation and provide feedback on the success or failure of past efforts. When viewed from this angle it becomes obvious the potential consequences of setting KPIs in ignorance of the many other influencers of behaviour in an organisation.
Managements use a great range of levers to influence and shape behaviour of the individual parts of their enterprise including:
Risk Mitigation Plans
Computer System (automated) Controls
Contracts/Agreements with Partners, Suppliers, Customers and Regulators
Project Mgt Plans
Water Cooler chats
Public and media proclamations
Executive or Board Orders/Decisions
C-Suite meetings/roadshows with staff
Reward and Recognition Programs
Review Report Recommendations
Training and Development Programs
Staff, suppliers, partners and other stakeholders glean what is expected of them from the above and use their understanding of the levers to guide their own actions and behaviour. The Performance KPI, when tied to personal bonus schemes, will often be seen by staff as the most important of these, as that is where the organisation is putting its hard cash.
KPIs are more important than what the CEO says
This is how some of Australia’s largest insurance organisations recently sent mixed messages to their staff: The Executive and Board emphatically stated that they wanted an ethical institution, but the KPI driven personal reward systems were totally based on profit-focussed measures. Decreasing costs (like minimising claim payouts) and increasing revenue (like making policy sales to any buyer) will become a very large focus for those measured and rewarded exclusively on profit. Essentially staff thought: “I hear what they are saying, but if they really wanted that, they’d change my KPIs”.
It becomes easy to see that KPIs must be in close synchrony with the remaining behavioural signals being sent to staff. If you want different behaviour to the past, you must look at all behavioural controls and ensure they are sending a synchronised message of change or else your staff will choose which of the conflicting messages to follow.
Not only must KPIs remain in synch with other influencers of behaviour, it is also important that they remain in synch with each other. If the KPI system is rewarding one set of management in one direction and another set of management in an entirely different direction, it is likely the two executive will come into conflict. For instance, if some executive’s KPIs and bonuses are tied to completion of a capital plan, and another set of management have KPIs about minimising budget expenditure, it is likely the two set of management will clash.
Don’t Ignore the Knitting
As with Strategy generally, if KPIs concentrate exclusively on what needs to change without including maintenance of core activity, it is likely that core activity will be sacrificed or, at best, neglected. Once we provide contingent remuneration, we are asking our staff to focus on those issues we are measuring and rewarding, which is implicitly asking them to not focus on others. A KPI developer must keep this in mind when developing a portfolio of KPIs for a team or individual. Once again this is another reason why some KPIs may not need to be “stretch”. They may act as a floor threshold (i.e. do not let this figure go below this level – e.g. do not allow employee churn to rise above 12% p.a) which are easy to achieve but ensure that core activity is still being completed whilst the individual strives for excellence in other areas of continuous improvement.
The Takeaway: What to Do
As a takeaway, KPI developers must be cognisant of the many ways that behaviour is influenced within an organisation and must keep in mind that the KPI and bonus are just one of these influencers. Do you have any examples of where KPIs have been inconsistent with other indicators of corporate intent leading to unintended dysfunction?
Previous KPI Series Articles
A Tale of Two Managers – a hypothetical where two managers react differently to a revolutionary idea. The story highlights the dangers of annual % increment KPIs to overall organisational performance.
The Parable of the Wet Driveways – an alternate reality were scientists need to figure out how to determine if rain occurred at night when everyone’s asleep. The story warns of the dangers of confusing correlation and causation when measuring performance/outcomes.
Oils ain’t Oils & KPIs ain’t KPIs – the many reasons KPIs are currently used in practice and how easy it is to accidentally start using the ones you have in ways for which they were not originally designed.
KPIs ain’t KPIs: Part 2 – exploring the ways that humans interact with KPIs once they begin to be rewarded based on the results. It’s not always as expected/planned.